Resources: Yes - Board Has A Say In Executive Compensation

Q: The board of our school was told that at next month’s meeting we will all have a chance to review both the executive director’s contract and the school director’s contract. I’ve not seen this on other boards. Shouldn’t a compensation committee handle this and only for the very top position – that of the executive director?

A: The general rule of thumb is, as you suggest, that the board hires the executive director and is responsible for his/her reviews and salary negotiations. The executive director is, in turn, responsible for evaluating all other staff members and determining their salaries. But, I’ve seen different organizations take different approaches that work for them. I’d begin by reviewing your bylaws. They may dictate that in your organization the board is responsible for handling all senior staff, or at least these two positions. If, as I suspect however, the bylaws say nothing about the board being responsible for the school director’s contracts, then the board should limit its review to the executive director – unless for some reason the executive director requested the support of the board in the process.

As to the question about the entire board reviewing the actual contract… Do you know the purpose of the review in which your board is being asked to participate? Is it to become aware of the terms? Or, is it to do the work that a compensation committee would otherwise do? If it is the former, it’s critical to understand that you and the other board directors could have a large fine levied against you personally for approving a compensation package later deemed excessive. So, while you may not necessarily go through the contract line by line, I would think that you would want to know the terms, the salary, the reasoning behind these, and how appropriate they are.

Assuming the purpose is to evaluate the current contract in order to make recommendations for the future, I agree that there are a lot of plusses to using a compensation committee instead of the board. Among them: it generally ensures a higher level of expertise at the table and the ability to focus more time and attention to the task. This is particularly true if you populate the committee with people who do this sort of work every day, who already understand how to create conditions of rebuttable presumptionto avoid the assessment of excise taxes; that is, they know the types of data they need to collect and how to document it in order to avoid fines imposed by the Internal Revenue Service (IRS). However, while larger organizations, or at least those with greater resources in the community, can usually pull together such a committee with relative ease – they rely on their board directors who work at major institutions like hospitals or universities to wrangle the compliance or human resource people from those institutions to help out – smaller organizations may not have access to such individuals in their circles of influence. When that is the case, using the board as a whole may be a viable alternative.

Whichever group tackles the assignment of preparing a new contract, protecting the organization and its directors is critical. This takes research. Sensitive to public opinion about high salaries in the nonprofit sector, the IRS demands that organizations be able to demonstrate that what they are providing their senior leadership in total compensation is fair, reasonable and not excessive. As documentation the IRS will accept at least three comparable compensation packages. To be seen as comparable, it’s best if the packages were awarded to individuals serving in similar positions in organizations located in the same geographical area with a similar mission and budget size. They can be nonprofit or for-profit organizations, but I suggest you avoid using all for-profit examples if you want to minimize pushback from the IRS. The information on comparables might come from independent sources that publish salary studies, such as the Nonprofit Times and Idealist which each publish an annual survey of national data, from phone calls made to similar organizations, from GuideStar which notes the compensation of the five top earners at each nonprofit registered with the IRS, or even job offers that were offered to your own top leadership.

The comparables, including the source(s) of the data, should be shared with the full board and recorded in the organization’s minutes. This allows you and the other board directors to make an informed decision when you vote on the contract. The results of the vote and the names of both those that were present for the vote and those of anyone who abstained for some reason, such as a conflict of interest, should be recorded in the minutes, as well. While this might not be the way you’ve worked the past, following this format will protect you and your organization in the future.

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